DCP Midstream, LP
Q2 2018 Earnings Call Transcript

Published: 8 Aug 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 DCP Midstream Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Irene Lofland, VP of Investor Relations. You may begin.

[Irene Lofland:]

Thank you, Gigi. Good morning everyone and welcome to the DCP Midstream second quarter 2018 earnings call. Today’s call is being webcast and the supporting slides can be accessed under the Investor section of our website at dcpmidstream.com. Before we begin, I’d like to point out that our discussion today includes forward-looking statements. Actual results may differ due to certain risk factors that affect our business. Please review the second slide in the deck that describes our use of forward-looking statements, and for a complete listing of risk factors, please refer to the partnership’s latest SEC filings. We will also use various non-GAAP measures, which are reconciled to the nearest GAAP measures and schedules in the appendix section of the slide. Wouter van Kempen, CEO; and Sean O’Brien, CFO, will be our speakers today. And after their remarks, we will take your questions. With that, I’ll turn the call over to Wouter.

[Wouter van Kempen:]

Thanks, Irene, and thanks to everyone for joining us. We continue to oppose this momentum into the second quarter with strong results, driven by our fully integrated portfolio and demonstrating the impact of DCP strategic execution and operational excellence. Starting with financial highlights, we generated adjusted EBITDA of $270 million and distributable cash flow of $166 million, which translates to distribution coverage ratio of 1.08 times for the second quarter. Notably, we continue to deliver on our commitment to strengthen our balance sheet and delever the company, illustrated by an improved leverage ratio of 3.6 times as of June 30. Due to the strong results, coupled with our expectation of solid second half of the year, we have strengthened our 2018 DCF guidance range to between $635 million and $670 million, which Sean will discuss later in the call. Our dedicated to focus on expanding and optimizing our diversified asset portfolio continues to drive stronger earnings and we’re proud of our track record of successful growth execution. Last week, we’re very pleased to bring our Mewbourn 3 plant online ahead of all announced timelines. This plant completes an important step toward more than doubling our current capacity by adding up to another 1.5 Bcf per day of capacity to meet the needs of our customers’ continued record production in the DJ Basin. The O’Connor 2 plant is now under construction and we’re making good progress on our 12th plant, which we recently named Bighorn. These two future plans are expected to bring our total capacity in the basin to approximately 2.3 Bcf per day, ensuring a bright future for the DJ Basin and our producer customers. In the Permian, the Sand Hills pipeline capacity ramped up to 425,000 barrels per day, three months in advance of expectations. And the Gulf Coast Express gas takeaway pipeline is not fully subscribed. Across our asset base, we’re seeing volume growth in areas, where we have existing capacity, providing capital efficient margin growth with little investment. Lastly, we recently announced plans to further extent a vertical integration by securing an option to acquire up to its 30% ownership interest in two NGL fractionators within the Phillips 66’s Sweeny Hub on the Gulf Coast. These are latest examples of our ability to deliver on our comprehensive growth strategy by also increasing our capacity utilization in the country’s top tier basins, meeting our customers’ demands, elevating our competitive advantage and driving increased cash flow. Shifting to the next slide, I’m excited to talk about recent updates to some of our strategic growth projects. As we discussed in our last call, over the past six years, we have transformed our footprint by investing in fee-based logistics assets to augment our large gathering and processing position, which historically accounted for about 90% of our adjusted EBITDA. This strategic shift has resulted in a much more balanced asset portfolio with adjusted EBITDA now comprised of approximately 45% marketing and logistics and 55% G&P. As you can see on that map, we have a terrific integrated and diversified footprint, which provides great choices on where we can allocate our capital, allowing us to select the best projects, which are lower risk and higher returns. We continue to see tremendous opportunity in the DJ Basin and have strengthened our position by bringing the 200 million cubic feet a day Mewbourn 3 plant online just last week. Within the basin, Mewbourn fleet is our transplant, increasing the total capacity to over 1 Bcf a day. All of our DJ Basin customers immediately benefit from this increase in capacity. And we expect volumes to ramp quickly. We’re excited to bring this plant into service ahead of all announced accelerations as we continue to deliver on our growth projects. Importantly, we completed construction of Mewbourn 3 and its associated field infrastructure went over 1 million injury free man hours. That is a remarkable feat. And I want to highlight an incredible dedication our employees and contractors have to safe operations across our entire asset base. Looking to the future, construction is currently underway on our O’Conner 2 plan, which is expected to be in service in the second quarter of 2019, with a capacity of 300 million a day, including up to 100 million a day bypass. Additionally, the Bighorn plant or 12th plant in the DJ is progressing well and is expected to further meet the projected needs of the basin with up to 1 Bcf a day of capacity including bypass. Inclusive of Bighorn, our total future capacity in the DJ Basin will be approximately 2.3 Bcf a day, which is more than double our current capacity. But here is the really important story, as we seen some other basins a singular focus on just processing expansions may result in constrained some bottlenecks in other areas for our producers. At DCP, we provide a comprehensive approach for all of our customers. We are driving vertical integration with downstream NGL and gas takeaway growth projects to ensure our customers midstream need are reliably meet from the wellhead to the NGLs markets. And let me highlight a few examples, in the DJ, we’re expanding NGL takeaway capacity through the Southern Hills extension via White Cliffs that will add 90,000 barrels per day in the fourth quarter of 2019. And looking to the Permian, we expanded the Sand Hills NGL pipeline to 425,000 barrels per day, three months in advance for our announced timeline, resulting in increased volumes and cash flows earlier than forecasted. Now moving to Slide 6. We’re extending our logistics value chain even further via Sweeny Hub, in partnership with Phillips 66, we recently secured an option to acquire up to its 30% ownership interest in 250,000 barrels per day NGL fractionators to be constructed within the Sweeny Hub on the Texas Gulf Coast. This is a very capital efficient opportunity as our $400 million investment will not way on our balance sheet until this option exercised in 2020 at the in-service date of the fractionators. The Sweeny Hub provides a critical market alternative to Mount Bellevue and ensures adequate fractionation capacity for growing NGL production, further optimizing our Sand Hills and Southern Hills pipelines, both driving fee-based earnings growth. And the option to partner with Phillips 66 in these new fractionators is not only an important component of our larger multi-year growth strategy, but it also allows us to add and expand relationships with strategic customers as we extend our footprint to the growing petrochemical markets and exports facilities in the Gulf Coast region. With that, I’ll turn it over to Sean to take you through our financial results.

[Sean O’Brien:]

Thanks, Wouter. Today I’m excited to share the details of DCP’s strong second quarter driven by robust cash flows from every component of our diversified portfolio. Starting on Slide 7, we continue to deliver on our financial commitments, with Q2 adjusted EBITDA of $270 million and distributable cash flow of $166 million. Our logistics and marketing segment continued the solid moment we built in the first quarter, reflecting higher earnings in pipeline capacity utilization from strong NGL production growth across all of our pipeline. We added significant fee-based cash flows and are quickly filling up new capacity additions brought online through our accelerated expansions on Sand Hills. An additional driver of these record volumes is the increase we saw on ethane recovery in the second quarter, contributing an additional $6 million of DCF from Q1 to Q2. Turning onto our gathering and processing segment, we delivered strong margin growth over last year with our key focus on driving more cash flow from our diversified asset base to improved reliability and efficiency and also from optimization benefits driven by our DCP 2.0 transformation. Additionally, our G&P assets have substantially higher volumes across our positions in the Mid-Continent, Eagle Ford and DJ, both filling up existing capacity and driving towards quick utilization of new projects coming online. All of these drivers results in $40 million of growth in our G&P results compared to the second quarter last year. As I guide on our last earnings call, costs were up in the second quarter due to higher expected maintenance and reliability spend, coupled with a step up in our investments in the company’s transformation efforts. Looking to the second half of the year, we anticipate cost to remain at Q2 levels. As we bring new capital projects online and invest in connecting additional volumes across our portfolio. And as Wouter mentioned earlier, we are strengthening our DCF guidance range to between $635 million and $670 million, elevating our midpoints to about $650 million. This updated driven by our strong first half of the year performance and our unparalleled execution around bringing growth projects online earlier than originally forecasted. All this is translating to our confidence in continuing to deliver strong financial results through the remainder of the year. On Slide 8, I want to take a moment and focus on the extraordinary growth we’ve seen across the entire value chain. First on our NGL pipelines, Sand Hills volumes are up 55% and Southern Hills is up 30% over last year. This volume growth is help us deliver strong EBITDA multiple returns on our Sand Hills expansion projects and will drive terrific returns on our White Cliffs extension via Southern Hills. On the G&P side of our value chain, we saw strong double-digit volume growth across many of our Permian Basins. We continue to see the Eagle Ford more back with volumes up 30% from last year. The DJ continues to be one of the best basins in the country, where we saw 15% volume growth in the last year. And this trend will continue with our newly announced Mewbourn 3 plant that went into service last week, adding another 200 a day of capacity. Also Mid-Continent volumes grew by 10% in the last year, driven by continued focus on optimization and reliability. The Permian was down compared to second quarter of last year, primarily due to operational factors. However, we believe the trend has shifted and is now on a positive trajectory with volumes up 5% from the first quarter and expected to grow the remainder of the year. All this growth continues to demonstrate the strength of our diversified portfolio, continued focus on executing high return low risk projects and our transformation from a G&P company to a fully integrated midstream provider. On Slide 9, I want to underscore our improvement in financial metrics, with our second quarter bank leverage ratio of 3.6 times, distribution coverage of 1.08 times coupled with ample liquidity and financial flexibility. All this execution continues to move us forward toward our goal of investment grade. We made notable progress on delevering and strengthening our balance sheet through successful recent capital markets execution. Recently, we prefunded our growth by executing close to $1.2 billion of financing transactions in the capital markets, including issuances of preferred equity and our recent $500 million bond transaction. Lastly, we continue to actively manage our commodity exposure, the investments in fee-based growth and our hedging program. We’ve recently reached our goal of approximately 80% fee and hedge for the remainder of 2018. We’re growing our logistics asset base and watching for market opportunities to layer on additional 2019 hedges. Resulting in 2019, currently add about 65% fee and hedged as we stand here today. And with that, I’ll turn it over to Wouter to close on Slide 10.

[Wouter van Kempen:]

Thanks, Sean. On the yields of a great first quarter, we continue to generate strong results, higher distribution coverage and lower leverage. In the second quarter, we lowered leverage to 3.6 times and generated $166 million of DCF. Year-to-date, we generated $377 million of DCF leading us to strengthen our guidance. As the second key point, we’re demonstrating our competitive advantage as a fully integrated midstream provider by successfully leveraging and expanding our G&P footprint to grow our lower risk and higher return fee-based logistics business. In a few short years, we are strategically balanced our portfolio between our two segments. As we expand our footprint across the value chain and expand our service to our customers in a country’s premier basins. Yet, we aren’t just investing in organic growth projects. Beyond the steel pipes, we’re undergoing a massive technological transformation via DCP 2.0, as we work to fully digitized and automate our business. On top of that with our positive trends in volume growth throughout notable basins, we stand ready to capitalize on this recovery with existing capacity and strong customer relationships. Finally, we continue to execute a disciplined capital allocation strategy that is creating long term momentum and increase cash flows. In the DJ Basin, we’re delivering on our commitments to increase processing and bypass capacity, while also providing the need of the NGL in gas takeaway infrastructure for all of our producer customers. Our logistics footprint in Permian continues to expand it’s construction underway for both the additional Sand Hills expansion and the Gulf Coast Express pipeline. And further down the value chain, our option in the two new fractionators within the Sweeney Hub is an important component of a more focus in vertical integration. In summary, we’re transforming our business by our multi-year comprehensive growth plan and our DCP 2.0 transformation efforts, while focusing on strong returns and maximizing our integrated value chain. Thank you again, for joining us today. And Gigi, please open the line for questions.

[Operator:]

[Operator Instructions] Our first question is from Shneur Gershuni from UBS. Your line is now open.

[Shneur Gershuni:]

Hi, good morning, guys. Just to start off a little bit here, as you noted in your prepared remarks, you posted some pretty good coverage, it doesn’t even include the upside from discovery potential and so forth. But what does the conversation on the IDR conversions begin? And I recognize to ask the question that Enbridge might be a little busy working on some simplifications now. But what do you think is the timeline or glide path that we should be thinking about potential IDR conversion down the road.

[Wouter van Kempen:]

So Shneur, I’m like – thanks for your question and thanks for acknowledging the good results here. So as it pertains still IDR conversion and when does the discussion begin? We have may not mentioned this a number of times publicly, we continue to have and confidently have to discussions about what do you do with IDR. I swear you sitting in a lifecycle, what is the right time to kind of deal with the IDR conversion? And I have kind of said, hey, it’s not a matter of if we will do an IDR conversation, it’s more of a conversation around when will you do it. And you want to do it out of a position of strength, where you have enough coverage. I told many times before but we do not want to do as an IDR conversion and buying in the IDR since then at the same time giving a lowering over our distribution to our unitholders. We don’t believe that is the right thing to do. The $3.12 is tremendously important to us in the history of the company. We have never lowered distributions to our unitholders and we don’t intend to start with that right now. So it’s about when is the right time, we haven’t been in the equity markets since early 2015. So Sean and his team have done a terrific job on making sure that we can finance to growth that we having, the very accretive growth without having to tap the equity markets. And so for us it’s about building coverage. What you mentioned already is that this coverage is building fairly significantly here and outlook for this year is very good. Obviously, for next year, the outlook is probably even better, when you start doing your models. So the discussion is ongoing and when we believe all that it’s ready to do it is between Phillips 66, Enbridge, DCP, the special committee, we always leave or let people know about it, discussions continue to be on way around the subject.

[Shneur Gershuni:]

Fair enough. I appreciate the commentary. Just as a couple of follow-ups, it’s wondering if you can sort of share with us your view on the DJ. I mean, you see some of E&Ps like Noble and Darco adding capital. At the same time, there’s this ballot initiative in Colorado. Do we read the additions of capital by E&Ps, the expectation should be there’s no change in the regulatory environment in Colorado and things continue to ramp up. I’m just – it kind of wondering on kind of your take if you’re even able to opine on this at all.

[Wouter van Kempen:]

Well, obviously I can opine on it what it means from our side as being one of the largest, if not the largest midstream service provider in Colorado and into the DJ Basin. So, let me try to unravel [ph] your question a little bit, because there’s a number of items in there. So let me maybe first start with ballot initiatives every two years, we go through this here in Colorado, give a little bit of insight the oil and gas industry here in Colorado is absolutely a cornerstone of our state’s economy. Industry has a total annual economic output over $30 billion. We are supporting over 230,000 jobs. So it’s a massive industry there been efforts like this in the past and I think the voters of state of Colorado are pragmatic voters. They understand the positive impacts of our industry and they’ve opposed types of these kind of extreme measures in prior elections. If you go to Initiative 97, it’s not supported by either candidate running for governor, not on the democratic side, not on the republican side to just kind of put it in perspective former U.S. Secretary of the Interior Ken Salazar, he called an initiative like Initiative 97 fundamentally unconstitutional. So if you then also look at what are good things that are opposed to that. There is a pro Property Rights Initiative, Initiative 108 turned in record signature for ballot and that would provide very significant protection against any takings by municipal governments or government levels. And here is I think what it is the important things, we for us, for DCP, we’ve always been very proactive in mitigating risk for DCP and for unitholders. We’re executing a business model that allows for stages of growth. We are not a, hey, go, all in, put every chip on the table, but more kind of working into increment that is what the Bighorn plant, plant 12 is all about, how can you do it in Bcf of capacity in different increments. So agile operation that can respond to any environment, but here is I think, what’s the most important thing? Let’s not put the cart before the horse here. Secretary of State has not yet validated a single signature for Initiative 97. And there is an industry that provides affordable energy and great paying jobs for Coloradans, well lowering carbon emissions as an industry will continue to make sure that we get to the right outcome and I think the voters of Colorado will get us to the right outcome, as it pertains to any of these initiatives. If you think about their bigger question about what does it mean for producers and yes, you’re absolutely, right. You seen some producers that are now talking about, Hey, we’re seeing constraints in part of different parts of the country in the Permian, therefore we’re going to allocate rigs and higher capital into the DJ Basin. And I think what does it speak about, again, Shneur is about the great balanced portfolio that we have. Our assets are very geographic diverse. We don’t have a single asset that makes up a vast majority of the company, if you look at the different pipes, the different G&P assets, nothing makes more than 20% of our earnings and some of the tightness that you’re seeing in different parts of the area are meaning that a place like the Eagle Ford is up 30% in volumes. Why? Because producers have moved rigs out of the Delaware Basin onto our acreage in the Eagle Ford, we’re going to see the DJ get more activity because other people are moving things out of the Delaware Basin into the DJ Basin. So if you take all of this together, there’s a lot to be wood to be chopped between here and the elections in November, as an industry and as a state. I think that we will get to the right answer and in the meantime for us, for DCP things are going really well in the diversified portfolio that we have is really playing well in the current environment.

[Shneur Gershuni:]

Other question, if I may. Just to – turning to White Cliffs, I believe there’s open recent going on, when you guys first in the initiative with stem group. You talked about 90,000 a day but potentially expandable up to 120,000. You sort of given the shifts in capital. Has there been enough demand in the open season to actually consider going, right to 120,000 right away. Would it be more cost effective to upsize and initially just any thoughts around demand expectations and the potential for it to get to 120,000?

[Wouter van Kempen:]

Yes, I think that’s probably a little bit too early at this stage, Shneur. I think as it pertains to what we were doing with the Southern Hills extension via White Cliffs and the open season. In the ample, we wanted to make sure is that, people know that if there was a pathway did you could go from the DJ to Texas Gulf Coast and you can do it at all open access pipeline. In the end, our philosophy for a company, we are an open access logistics company. We are very agonistic to whatever the approach is that our customers want to do. So an open season is for customers to sign up for long term transportation. That maybe one outcome, other outcomes that may happen that potential customers come to us and say, hey, we actually don’t want to take out the transportation. But DCP with your marketing arm, why don’t you buy all the barrels from us and you deal with all the transportation and everything downstream. And that actually is a preferred approach for us. Because what it will mean for us is, that we basically have control of the barrels and we can take those barrels and then leverage those into different projects. Like what we did with Sweeny 2 and Sweeny 3. So as it pertains to where did the open season come out for the Southern Hills and White Cliffs extension? We’ve signed up so additional barrels, some additional producers or customers, where we can market their barrels. We will take control of the barrels. This was going to be a great project to start with just without 40,000 to 50,000 barrels after the open season and contracts of what we’ve signed become an even better project.

[Shneur Gershuni:]

Great. Thank you very much. Really appreciate all the color.

[Wouter van Kempen:]

Thank you, Shneur.

[Operator:]

Thank you. Our next question is from Jeremy Tonet from JPMorgan. Your line is now open.

[Jeremy Tonet:]

Good morning. Just want to start with Sand Hills here, and seeing how it so highly, utilize so quickly here. I was just curious if there’s any way to kind of pull forward. The expansion here just given the market demand and I guess later there did you see the potential? What your thoughts on further expansion beyond what you’ve now given how demand trends are shaping up here?

[Wouter van Kempen:]

Well, Jeremy. I appreciate the vote of confidence. I also – we try to do whatever we can do, but miracles unfortunately are a little bit out of our league. But we have expanded significantly, we’ve pulled all kind of expansions forward, already if you recall on like, we’re at $425,000 barrels a day here today, that is 35,000 barrels or 55,000 barrels of where we would expect to be at this time. So not only by some of our DCP 2.0 technology efforts, where our team came up with the dynamics that bonds and is increasing overall flow in the pipeline by 35,000 barrels a day. We accelerated some of the extensions that we’ve done. I tell you, we’re working tremendously hard to get through to 485,000 barrels as quickly as we can. Can we move that forward significantly from where we are sitting here today, probably not maybe a couple of weeks here or there. But the good thing also, if you’re not going immediately from the current 425,000 to 485,000 by every pump station that you put in your overall capacity a little bit. So over the next couple of months, every for six weeks when we put pump station in service. Our capacity will go up a little bit. So that is a good thing. We are obviously looking at what are we doing, next I might be spoken with all of you about that, what are the opportunities for us to do another loop, a full loop for the extensions all of that we’re spending a lot of time and effort on them looking at that. It’s a little bit too early right now to talk about what the answer is going to be.

[Jeremy Tonet:]

Thanks for that. And then just moving to ethane rejection here, I was just wondering, if you get updated as far as what you’re seeing across your asset and how is that comparing tier expectation seems like it’s helped out NGL pipes bit here.

[Sean O’Brien:]

Yes. So we’ve seen – I referenced a $6 million uplift Jeremy in Q2 from increased ethane recovery, I just put some of those numbers in, I think we were projecting around 40, 45, if you think about Q1 the numbers now in the mid-30’s somewhere in that range. So the better 10 change, so that benefiting the pipeline both Sand Hills and lot of it Southern Hills as well. We were cautiously optimistic. We’ll look at that going forward. We had begun in that 30, mid-30 –I’m sorry, mid-40 range, when we set our guidance. We’ve seen some improvements. We’ll keep an eye on it. The rest of the year obviously and see if that continues as we go forward. But it’s definitely benefited us in both Q1 and Q2.

[Jeremy Tonet:]

Got you. Just want to go to O&M quick here. It seems like that ticked up a bit this quarter. Could you just remind us as far as what type of seasonality, you see there, seems like it stepped up a bunch over 1Q? But then if you look back to last year, kind of trailed down over the balance of the year? Should we expect that kind of a similar trajectory this year?

[Sean O’Brien:]

So you’re actually right on the trend. So obviously we – when I indicated on the call, last call, that we would see it tick up quite a bit. Q2, Q3 tend to be heavy reliability expense months for us. We do a lot of our turnaround in those quarters, I think you noted, if you look at the trend Q2 of this year really was pretty close to Q2 of last year. Although as we said, up a bunch from Q1. I think the one difference that you’re going to see a little bit going on the remainder of the year and I was alluding to it on the call is that, I think we expect that trend to continue. You’re right. We dipped off a bit last year, this year with that – we’ve got a lot of growth coming online, obviously, Mewbourn 3. You’ve got all the increases in Sand Hills. And other things that we’re working even in some of their existing assets. So I expect that the trend more look similar to Q2, the remainder of the year. We’re also – I think, Wouter mentioned it earlier, we’re definitely up and continue to expand on our transformation efforts and making sure that we keep those going. So we’ve done an amazing job over the last three to four years more than offsetting inflation, more than offsetting a lot of growth coming in. We’re continuing to do that but we’ve got a lot of things coming inline and also, you think about the growth by shared with you, the increases in areas like the Mid-Continent increases in the Eagle Ford. Those will drive some expenses as well. Obviously, they’re driving incremental margins.

[Jeremy Tonet:]

That’s helpful. Thank you. And then one last one if I could, just there’s a lot of discussion on the topic of Permian basin differentials both on nat gas and NGLs. I just wondering, if you could walk us through a bit maybe your sensitivity or is kind of a pluses and minuses for your business on the G&P side, and on the marking side, if that basis widens out more there?

[Sean O’Brien:]

So couple things, obviously, as we go into the year and we set our sensitivities, we’re predicating some level of basis differential at that time. I think you’re alluding what they’ve wind the bunch and that has obviously as we settled gas in areas like the Permian that has hurt us, right, where we’re getting less for the gas, at the end of the day for the gas to resettling there. So that’s a negative. You asked for the positive and minuses. On the plus side, we do see, we have the Guadalupe asset that’s over 200 a day that goes from Waha to Katy. And in the value in that basis or the value in that the revenue stream, we gather from that asset has gone up quite a bit. So they’re actually really a fairly good offset, if you think about what we make when the basis kind of collapses or what we lose in the Permian settling gas and what we make on that pipeline. They’re fairly good offsets that’s actually played out quite well for the company. And that’s one of the reasons, you need think about, as we think about the rest of the year, we’re going to keep an eye on that. That continues to be something that we’re concerned about we want to – it has tightened and just a little bit in recent not enough to get us really excited. But at that’s watch out for us the rest of the year. In terms of our sensitivities, we set those sensitivities, when the base was not as wide. We’ll keep an eye on that if it gets big enough. We’ll go ahead and revise our sensitivities towards the back end of the year. Just think about that in two ways, there were gas sensitivity will go up or NGL sensitivity will go down. So net-net it’s not a big driver of our overall sensitivities.

[Jeremy Tonet:]

That’s helpful. Thank you. That’s it for me.

[Operator:]

Thank you. Our next question is from Jerren Holder from Goldman Sachs. Your line is now open.

[Jerren Holder:]

Thanks. Good morning. Maybe just start off with hedging, just given the higher ethane prices that we’re seeing. Are you guys hedging more ethane these days, I know historically, you guys have hedge more propane and butane. Just want to see how you’re thinking about that?

[Sean O’Brien:]

So we have overall Jerren. We have layered on some additional hedges. I referenced earlier that we’re starting to get 19 hedges on. So the good news is – and then obviously, we’re at our 80% target for the remainder this year. So we’re really excited about that. As you think about the remainder of this year and next year, ethane has improved, I would tell you, it’s not at a level yet that we’re adding massive amounts of ethane position or hedges on to the position. The hedges we do have and we’ve been able to do for next year still remain to be crude. We saw some strong crude opportunities in 2019 and obviously, the propane and heavier end of the barrel, the butane. So it getting closer on the ethane but not quite there yet.

[Jerren Holder:]

Got it. And then is there any update on Discovery – the outlook there potential for that cash payment to come in.

[Sean O’Brien:]

No. No change in the guidance we gave on our previous call. Now we think that tweaked a little bit was the timing and even if you follow the cash flow, we’re – our distributions were a little bit lower in Q2. We expect that to come back in Q3. But that’s relatively de minimis in the grand scheme of things. So, the full year guidance we’ve given you on the impact on Discovery still holds. Obviously, as we think about the future going into next year and beyond it’s still a good basin. I know Williams, our partners working on getting volumes back into that asset.

[Jerren Holder:]

Okay. Great. That’s it for me. Thank you.

[Operator:]

Thank you. Our next question is from Elvira Scotto from RBC Capital Markets. Your line is now open.

[Elvira Scotto:]

Hi. So just to follow-up on an earlier question, so if cash flow ramps from kind of increased activities in new projects? How do you think about the tradeoff between retaining cash flow to internally finance future growth versus returning more cash to unitholders through a distribution increase? Or do you think that an IDR conversion happens first before increasing the distribution?

[Wouter van Kempen:]

Yes. Wouter here. Let me take that one. I think – I’m like we’re looking at every single piece of this. I think, what I said earlier, when Shneur ask the question. We believe that building coverage is the right thing to do now. Building coverage is going to provide us with great optionality on a number of different items. If the providers with optionality to self-fund it will provide optionality to buy the IDR and make sure that you protect occurred $3.12 and then still have enough coverage, if a potential downturn would come. So for us I think building coverage is the most important thing. So and then right now, looking at increasing the distribution, it’s probably not what we believe what would get us the greatest banks apart from our unitholder. So for now it is about building coverage, using excess cash flow to continue to get these great growth projects and a great growth portfolio that we have online as quickly as possible. And obviously, if we don’t have to go into the capital markets, but can use internally generated funds, you both got a nominator and a denominator effect in the long term. So it really helps tremendously in the out year. So that’s really what we’re focusing on right here, right now.

[Elvira Scotto:]

Thank you. That’s very helpful. And then, you touched on this a little bit on what you’re kind of seeing in the Permian, but maybe if you can dig in a little deeper. If there is this growing concern that once you get to the end of this year, early next year that natural gas takeaway will be constrained, and maybe your see more gas flaring at the wellhead, which could lead to sort of less volume growth on the processing side and the Permian. Just – what are your thoughts on that and sort of your volume growth outlook both on the processing side in the Permian as well as NGL takeaway?

[Wouter van Kempen:]

Yes, so on the – the cup is half full, the cup is half empty today. And on the hand, if you think about there’s a little bit – in the shorter run, it’s a little – it’s kind of what I would call a champagne problem. Because everything is getting full, which means that from a overall utilization and from a financial point of view, things are really, really good because you’re making a lot of money. At the same time, we got to get to a place as an industry between the midstream sides and the producers where we have enough capacity and adequate capacity, and like nobody likes bottlenecks and it could be gas takeaway but it could be labor or it could be frac sand or it could be water. There’s many other different ways that I think bottlenecks can show up. For us, we spend a lot of time with our major producers there. Our major taking kind producers confirm they have adequate gas takeaway. We have some processing capacity that is sitting open, and is not sitting in the most congested areas of the Delaware Basin. I think there’s a lot of congestion down south we’re sitting in the north. So for us, we believe that our second half volumes in the northern Delaware and southeast New Mexico are going to continue to grow. Our pipelines will be full. We have the balanced portfolio that I mentioned earlier. So yes, when G&P basis starts widening on gas, we’ll make that up and then some on the Guadalupe side. The NGL pipelines are going to be full. And then there was a reason why we did Gulf Coast Express and why we were the first ones to gather with Kinder and Targa to develop that pipeline because we needed it. And it’s going to be first pipeline online, it’s fully subscribed and it’s going to provide us with a lot of great returns as well. So in the end, we got altogether work on alleviating the bottlenecks that we’re having as an industry. I think everybody is working that, in the meantime, for us what it means is assets are full, we’ll continue to fill them up and it provides some pretty good financials and outlook for 2018 and 2019.

[Elvira Scotto:]

That’s helpful as well. Just a couple of other quick ones for me. I mean, can DCP benefit at all from the – sort of the widened Conway to Mont Belvieu ethane spreads?

[Wouter van Kempen:]

Not as much like there’s at least one other in our space that can really benefit from that very significantly. Obviously, our marketing teams are, every day, making sure that we look at how do we optimize the portfolio. You’ve seen us do that during major events when there was congestion in the country, where we’re teamed at the right things, but right now, I think a lot of things that are driving some of those issues is around frac constraints, and you’re not seeing a massive uplift I think in our financials from Conway to Bellevue arbitrages.

[Elvira Scotto:]

Got it. Great. And then the last one for me is just on the guidance, bringing up the low end, is that primarily because you had Sand Hills and Mewbourn come on earlier than expected?

[Sean O’Brien:]

Yes, yes, Elvira. I think that’s part of it. We brought some growth online quicker than we thought. I also would tell you that the first half of the year performance, we feel really good about that. So we came out of the gates really strong, not just around the growth projects coming online, and obviously, to your point that benefits the second half of the year. But that slide I showed, our base businesses in both G&P and the MNL are performing quite well with volumes ramping up very nicely, and obviously, as we add – we’ve added capacity throughout the year on Sand Hills we’re filing that up very quickly. So out of the gates really strong, we felt good enough to strengthen our guidance because of that.

[Elvira Scotto:]

Great. Thank you. That’s all I had.

[Operator:]

Our next question is from Dennis Coleman from Bank of America. Your line is now open.

[Dennis Coleman:]

Good morning, there. Couple from me, most have been asked. But if I can just a couple of on the Sweeny frac option. Obviously, clear – good projects sit with your one sponsor, PSX, but no clear fit to the other. Was there some kind of payment or consideration for the option in any way that – because it’s a sort of a 15% owner?

[Wouter van Kempen:]

So I’m not sure if I completely understand the question, Dennis, but let me kind of talk through this. The way we do and when DCP has been run and has always been run is what we do is what is right for the DCP unitholder. So it’s not about, hey, what is right for one party or another party. If it’s right for the DCP unitholder, it is right for the owner of the GP. So in this case, we’ve spoken for a long time around how there is things that we can do between ourselves and Phillip 66. If you look at our service offering that we do from the wellhead in 17 different states to the market centers and then you look what Sweeny is doing, also what the Phillips 66 is doing, beyond that with their infrastructure and their export capabilities and their global capabilities, there is no other party that can give a better offering than those two together. So we have done that for many times, we have gone to different customers and say here’s an offering that we can provide you that other people can’t do. And one of the outcomes of that is – was with Sweeney, we are the largest NGL producer in this country, we control more barrels than anybody else in this country. And so if we have barrels that we can utilize to make other projects happen, then we obviously will use those. So that’s what we did here. We are committing barrels to Sweeney 2 and Sweeney 3, we have barrels that are committed to Sweeney 1, and in return for that we get a 30% ownership interest in both of those fracs. And I think those are great, great projects they fit tremendously well with us. They’re going to be very good return projects. They’ve fit – they’ve obviously fit very well with Phillips 66 and there are no separate payments or other things that happen. These are arms length transactions that are governed by a special committee. And this is a great transaction for the DCP unitholder.

[Dennis Coleman:]

Okay, I got it. And so just in terms of timing. Obviously, no need to exercise the option until the in-service. But would there be any circumstances where you might go ahead and exercise the option early?

[Wouter van Kempen:]

No, I think the great thing what we’re doing is, and Sean talks a lot about is, how we’re very efficient with our capital, and how we make sure that we protect the balance sheet. And part of one thing that we negotiated this part of this transaction and we agreed with Phillips 66, that we would not exercise the option until the in-service date. So there is absolutely no pressure on our balance sheet during construction time period that is the two-year period, and we will have the option to exercise at in-service on this $400 million option. So tremendously efficient from a balance sheet point of view. And it’s no different than you’ve seen us do with some other projects, like the Cheyenne Connector is structured exactly like that, where we have option to exercise, and therefore, doesn’t put any pressure on the balance sheet for us. And I think another great thing for our unitholders.

[Dennis Coleman:]

Okay. So just to be clear. So there’s not even the option to exercise early? It’s only at in-service?

[Wouter van Kempen:]

Well, why would I exercise the option early? Just to put my money on the balance sheet? I don’t think that makes any sense. Unlike – Dennis, unless there is something that you say, "Hey, here’s a great reason to exercise early." But we have unilateral right to exercise the option, I think it’s up to 30 days in prior to the in-service date. And our expectation like with the Cheyenne Connector is that we will exercise those options because both are great projects. Exercising them tomorrow, I’m show that Phillips would love us to do that but at that time we would barely pursue be – capital into the project, and I don’t think that’s the right thing for the DCP unitholder.

[Dennis Coleman:]

Okay, okay. I got it. Okay, so switching obviously, a great job on Mewbourn 3, bringing it on so quickly. The efforts that you did there, anything that sort of changes, sort of, procedures and construction protocols that will translate directly into accelerating, say, O’Connor or the Bighorn plants?

[Wouter van Kempen:]

Yes. So construction commissioning start-up, all of those were ahead of schedules. So that is a great thing just for people to kind of understand what does it mean. You put 200 million a day online. So do you immediately go when you flip the switch from 0 to 200 million a day of additional processing capacity. It doesn’t really happen that way. You’ve got to think about this as breaking in a car, you’re not supposed to redline it immediately, you bring it in for an oil change a little quicker, so you have to do some service on it. A gas processing plant, even though it’s a $400 million infrastructure plant, is no different than a car from that point of view. But I think what is really exciting is spot readings in the system are over 1 Bcf a day that we’re seeing here. As of today, we saw over 1 Bcf a day going through the system. So things are really, really going well. With that said, and to your question, what does it mean for the future, hey, Mewbourn 3 was yesterday, great news, great things happen there but it was yesterday. Everybody is focused on O’Connor 2, and making sure that we get that plant online as quickly as possible. We accelerated O’Connor 2 on our last earnings call by three months already. So some of the things that we’ve learned on how do we build this plant, and I think Mewbourn 3 is probably from large gas plants, probably one of the fastest if not the fastest constructed plant this country. But we’re going to try to do exactly the same with O’Connor 2, and we’ve spoken internally about, hey, we want to beat the record that we set with Mewbourn and apply that to O’Connor 2 and get that online as quickly as possible. At the same time, we got to do it safe and our teams and our construction teams and our contractors have done a great job on getting Mewbourn online in a very, very safe manner with over 1 million man hours of injury-free working. We’re going to do the same on O’Connor 2, can’t wait that to come online. We’re going to move 100 miles an hour. And then, yes, we’re keeping everything online with Plant 12, the Bighorn plant as well. So we filed the permits, we expect to get those in the next couple of months, we are spending money on low lead-time items. So we can stay on that timeline as well and start constructing that plant.

[Dennis Coleman:]

Got it. Thanks for the answers.

[Wouter van Kempen:]

Thanks, Dennis.

[Operator:]

Thank you. Our next question is from Michael Blum from Wells Fargo. Your line is now open.

[Michael Blum:]

Thank you. Just wanted was question, actually, on the DJ natural gas take away, so it is related to Cheyenne Connector. So the broad question is, do you feel like you have enough ample takeaways for your customers to vacate their gas from the basin? And then is there any reason to think that you won’t exercise your option on Cheyenne Connector? And then, I guess, related to that, that gets you to the Cheyenne Hub but from there do you still need to contract together all the way out of the basin? Thanks.

[Wouter van Kempen:]

Okay, Michael, there are number of questions about the constraints in the Permian and there is constraints. If you have constraints in one area, it really starts clogging up other parts of the country as well. So yes, we’re seeing things a little tighter here in the short run from a natural gas takeaway in the DJ Basin as well. We are waiting on some expansions that CIG is doing. So that will give us a little bit of breathing room for everybody in the basin. So that’s supposed to come on somewhere over the next month or two. Those are going to be helpful. Cheyenne Connector, I don’t see any reason why we wouldn’t exercise our option. We do not have to take additional takeaway capacity on any other pipes to get the gas out. There is ample takeaway capacity past the Cheyenne Hub for us. And I would expect that we exercise the option for that project when we do. So yes, I think for now, the marketing teams are able to kind of manage everything in getting all the product out. It’s probably going to be a tiny little bit tight here over the next month or two. Making show that we – that CIG comes up with our expansions, but I think we’ll be able to manage everything.

[Michael Blum:]

Great. And then just want to ask a question on coverage and leverage. Leverage is clearly improving here and so is coverage. What’s your latest thoughts on, kind of, targets? Where would you like to get to as a company from a coverage perspective? And then from a leverage perspective, if you could talk about those from a credit agreement perspective, and maybe are there already – and also, a rating agency leverage calc?

[Sean O’Brien:]

Yes, Michael. So let’s do coverage first. We’ve been in the 1.1 range because something to think about is, we still have – and I think someone alluded to it earlier, we still most of the growth is not come online, right. We’re all some of the Mewbourn 3 here, and it really didn’t generate any cash flow in Q2. Sand Hills at 4.25, all of that’s going to happen post Q2, all the way to 4.5. So I think to think our goal was 1.2 or stronger. To be above 1.0 obviously, it’s a given, but we’re really – we’re targeting 1.2 plus. What we’ve been delivering solid 1.1, and we’ve a lot of really strong cash flow coming online. So I see a pretty good line of sight to getting to that goal. Our goal on leverage – and the 1.2 is important for all the things Wouter mentioned earlier. Dry powder on the IDR, obviously, funding growth or maybe even ultimately at some point raising. If you think about that leverage metrics were in the mid-3s roughly. On what we call the bank metric. Our goal is to be between 3 and 4. We’re perceiving obviously heavy – quicker than I thought and improving quicker than I thought as cash flows have been very strong. On their rating agency side of the equation, is between 4 and 5, we’re hovering in the mid-4s there. So same type – they correlate fairly well as we improve on one, we improve on the other. So I think we’re very close to getting to our targets. And obviously, as coverage grows because of increased cash flow, our leverage metrics improve. The endgame at the end of the day, Michael, is we get to IG. So I think with metrics like those and we’re on the cusp, we feel like IG should be attainable by the company. Just got to get the RAs on the same page.

[Michael Blum:]

Great. Thank you.

[Wouter van Kempen:]

Thanks, Michael.

[Operator:]

Thank you. Our next question is from George Wang from Citigroup. Your line is now open.

[George Wang:]

Hey guys, strong quarter.

[Wouter van Kempen:]

Thanks, George.

[George Wang:]

Yes. Just going back to the operating expense, you have mentioned the second half of this year is going to be comparable to second quarter 2018. Do you guys have any thoughts on the level of expense next year, just given the higher activities? But, I mean, also did you guys have more levers to pull to reduce operating expense in terms of, sort of, a cutting excess capacity in Eagle Ford in east Texas?

[Sean O’Brien:]

Yes. So couple of things – I think it was couple of questions in there, George. One, yes, we’re spot on, obviously, I made those comments, we will trend more like Q2, and I think that’s because we obviously have more capital coming online. And as I mentioned, as – the high-class problem, volumes are increasing in a lot of our base assets. That does drive some expenses. The economy’s doing fairly well. So a lot of our consumables are going up. Again, that’s not a horrible thing as long as the margin side is moving and so far that’s been the case. I don’t give guidance for next year, we don’t typically give guidance, but I think as you think about next year, you have more capital coming online, we – you asked about offsets – we’ve – Wouter and I both referenced multiple times this investment in transformation. There should be a hump there, right? You’re investing, your automating, your adding optimization type capabilities, this is systems, its people, it’s those types of things. But those should drive longer-term costs. And we’ve had a really good track record of adding assets, adding investment and basically, offsetting these increases. So I would look for us to continue to drive that. We’ve done a lot of that over the last three years. Taking guidance for next year but a lot of those investments hopefully will pay and start to have some positive impacts on costs. And then I think your mentioned assets. At the end of the day with volumes including – we definitely have consolidated where we’ve seen assets declined over the last few years. We’ll continue to look at that, but luckily, right now, we’re seeing pretty good volume growth across most of our basins.

[George Wang:]

Right. Also in terms of maintenance CapEx, that the trend hasn’t been quite steady over the past few quarters. Did you guys have any more thoughts on the level maintenance CapEx kind of the trend going forward?

[Sean O’Brien:]

I do think – you a saw kickup in Q2 slightly, and I think you’ll see that trend continue. I gave – the ranges $100 million to $130 million, I think I’m still – $100 million to $125 million, I’m still in that range. At the end of the day, we are seeing increased volumes that you’re going to see increase the product replacement-type stuff. So we’ll keep an eye on that, George. But I don’t see any massive increases.

[Wouter van Kempen:]

Hi, George, it’s Wouter. Just to add quickly to that. Sean showed the slide of how much volume uptick we have all throughout the system, which means assets are running, they’re running harder, which in the end means you’re probably going to spend a little bit more on maintenance. So it’s a very logical thing, and I’m really not worried about some of that cost and that overall cost going up as long as the margin comes with that. And I think you’re clearly seeing that from us here today from the first six months, how we’re looking at the next six months, the guidance that we’re strengthening, that – yes, cost may creep up a little bit because we’re more assets, we’re running them harder, but you know what, you’re well offsetting it by getting more margin. So spending $1 to make $3, I’ll do that any day of the week.

[George Wang:]

Yes, that totally made sense. Last question, just going back to ethane uplift. It’s nice to see you guys are doing incremental ethane recovery. Just want to know if you guys have any update on the – in terms dollar amount for the ethane benefit. I mean, in the past you guys quoted like $40 million of ethane uplifts with similar level CapEx, maybe additional $100 million uplift if you sort of go – be able to more – to accommodate more ethane recovery. Do guys have more sort of color and update on this perspective?

[Wouter van Kempen:]

Yes, well, George, let me take that quickly. So ethane uplift, we’re seeing six months here in this quarter. You can annualize that, that’s $25 million. I think what is more important, what you’re talking about when we spoke about those numbers two years ago that was just talking about getting more ethane in the system. We’re actually – gone above and beyond that by just broad much more NGL growth all throughout our system. So you get better netbacks G&P side of the house, we’re getting more flows through the pipeline. So a lot of that is – has already come in and continues to come in. There is more opportunity left, obviously, but it’s tough to kind of look at what everything has happened over the last 18 months with significant growth all throughout our system to take that snapshot and say, "Hey, what piece does apply to ethane or what piece applies to the broader NGL barrel." But I think net-net, what you’re seeing is massive uplift throughout the entire system by just increased growth, increased volumes coming out of the plants and going on the pipelines.

[George Wang:]

Okay, thank you so much. And once again, congrats on the strong quarter.

[Operator:]

Thanks George. Thank you. Our next question from Selman Akyol from Stifel. Your line is now open.

[Selman Akyol:]

Thank you. In your opening comments, I think you talked about 55%, Gathering Processing, 45% Logistics & Marketing. If I just look at over the next couple of years, I guess you’ve got Gulf Coast Express, Cheyenne Connector, the frac interest coming. So longer term as you look out, how do you see that shifting if at all?

[Sean O’Brien:]

I think – yes, you’ve really picked up on obviously a lot of growth – as you mentioned, on the logistics side, but there is also some similar growth if you think about the DJ, Mewbourn 3, O’Connor 2, Bighorn coming online and then, Selman, if you think about the increase in just the base assets that we have, the Eagle Ford being up 30%, obviously, is – it’s a high-class problem, right? Our G&P volumes and our G&P margins are up. So I look – holding everything constant, looking at where – as we see what we know about growth, I think it will hold currently where it is or may be grow slightly to the M&L side. Our goal was always to get it pretty close to 50-50. I think it’s a win-win when both sides are growing, and that’s kind of what we’re seeing right now.

[Selman Akyol:]

Okay. And then – appreciate that. And then on DCP 2.0, you’ve talked about how it helps offset inflation. So I guess the first question is where are you seeing cost inflation? And then the second is, can you talk about what DCP added in dollars to this quarter?

[Wouter van Kempen:]

Well, yes. I am going to – not going to give you exact details around how much does this add to the quarter. But I can tell you that it’s – I’ll give you one very simple thing to do. Take the 35,000 barrels that we got on Sand Hills, multiply that times rate, times 365 days a year and you’re going to like the number quite a lot. But this is going to go into every little piece that we’re doing, it’s going to go into reducing overall – over time, it’s going to reduce the fair [indiscernible] efficiencies, in Sean’s team. So what we’re trying to do is, "Hey, I bet this, in their entire business completely changed the way we do work." And you’re seeing, in the end, strong G&P results, strong Marketing & Logistics results. And you know what, we couldn’t have done that without what we’re doing from a technological point of view, in completely changing the way we run this company. But with that said, there is much, much more to do, and I think there’s much more opportunity. We’re going to continue to invest money in it aggressively to see that – to make sure that we completely change the way we run and operate this company. As to your point around inflationary pressures, I think there is – a lot of our costs are tied to commodity. So if crude oil prices go up, then a lot of consumables and things like that are going up. So everybody in the industry will see that, "Hey, we use a lot of lube oil." Lube oil is directly linked to the price of crude oil. So if crude oil goes up, lube oil prices go up. But I think you’re seeing other things as well, you’re seeing some tightness in different markets as it pertains to labor. I’m like, we’re at a historically low unemployment rate in this country and some of the areas that we do business, like the DJ business here in Colorado. The state Colorado is one of the lowest employment levels in the nation. Places in the Permian where your see tightness in the labor market. So obviously, that means that you have to spend some, and that is some of the inflation that you see creeping into the numbers. But I’m not worried about it. As I said earlier, when George asked the question, if we have to spend $1 to make $3, I’ll do that any day of the week.

[Selman Akyol:]

All right. Thank you very much.

[Wouter van Kempen:]

Thank you.

[Sean O’Brien:]

Thank you, Selman.

[Operator:]

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Irene Lofland, VP of Investor Relations, for closing remarks.

[Irene Lofland:]

Thanks, Gigi. Thanks, everyone for joining us today. If you have any follow-up questions, please feel free to give me a call and reach out. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect.